Liquidity 02 incl QE, Twist, LTRO, APP etc (Jun 14 - Dec 25)

[winston]

The Global Liquidity Squeeze Has Begun

By Michael Snyder

Source: The Economic Collapse Blog

http://www.thetradingreport.com/2015/04 ... has-begun/

[winston]

Local bonds burden weighs

It is reported that the People's Bank of China may be looking at ways to free up credit, in addition to cutting interest rates or a comprehensive capital-reservation reduction policy, following some of the European financial crisis measures.

One of these is to allow Chinese banks to swap bonds issued by local governments for cash to boost liquidity and lending activity. Actually it is better to say that the PBOC has its own version rather than to simply following that of the European Central Bank.

Exchanging local government bonds for cash may seem similar to the ECB's longer-term refinancing operation, or LTRO. At the end of 2011, the ECB issued billions of euros, via LTROs, to troubled European banks offering them three-year, low-cost loans.

But the Chinese version of the LTRO is designed to ensure that the banking system has sufficient liquidity. The reasons for insufficient liquidity are many, and one obvious sign is capital outflow.

Capital flows data indicate that the PBOC's balance sheet in the first quarter fell by 251.1 billion yuan (HK$314.12 billion), creating a record drop.

Under a debt-for-bond swap program, local governments are allowed to issue 1 trillion yuan in special debt to replace expiring debt (mainly bank loans) into bonds that carry lower yields and with longer maturities.

That will result in annual savings of up to 50 billion yuan in interest payments for local governments. Commercial banks will become the main buyers of the special local government debt.

This can ease the pressure on risky loans. However, the problem is this: will there be an increase in bank loans when the potential bad debt risk of banks declines? At the same time will the economy benefit from it? Will the money not be drained? This will be the topic next week.


Source: Andrew Wong Wai-hong, The Standard HK

[winston]

A Money Murder Mystery: Who Killed the Stock Market?

By SHAH GILANI

Source: Money Morning

http://moneymorning.com/2015/05/25/a-mo ... ck-market/

[winston]

The Casualties of Central Bankers By Harry S. Dent Jr.

In the early 1700s, the country had run up astronomical debts from endless wars with the British. They needed money… desperately.

So, John Law — the first central banker in France — turned the Mississippi territory France had just acquired into a stock company.

Stocks were a new trend. People weren’t prepared for the crash that comes when stocks teeter too high. So, they went all in… and what resulted was one of the fastest, most exponential bubbles to build and just as quickly burst that the world has ever seen.

It took just two years for this venture to became a popular get-rich-quick scheme. Shares or parcels of land were sold to the public and financed by the government at lower-than-market rates.

Little did buyers know, the land was basically a swamp, far away so no one could see what they were getting.

Thus, the Mississippi Land Bubble peaked in 1720… then crashed over 90% in just over a year.

It’s one of the classic examples of political manipulation, and the first major financial bubble in modern history. And yes, it was engineered by a central bank… setting a precedent for the future.

England had a similar bubble when it turned its monopoly on trade with the South Seas Trading Company into a public stock — to pay off its debts from the same war France had with them.

These governments didn’t concern themselves with paying their debts in a more sound, responsible way. They manipulated the market to create an artificial bubble for their own advantage.

The U.S. government had its own land scheme in the early 1800s. In an effort to get people to populate the newly acquired Midwest following the Louisiana Purchase, they offered raw land at bargain rates and — you guessed it — low cost government financing.

It was the greatest real estate bubble in U.S. history. And it burst just as quickly.

By the early 1840s, Chicago real estate fell over 90%, along with most of the Midwest.

It got so bad that it turned into the worst depression the country had seen, between 1836 and 1843.

Then came the U.S. Federal Reserve… created to offset the extreme volatility in the economy and interest rates created by that very depression and more to follow into 1896.

A near-century later, after years of stimulus and lower interest rate policies, an even greater depression happened — the Great one, itself.

This was no accident…

When these political entities constantly stimulate the economy in every correction, it never has a chance to rebalance. All we get are greater bubbles, greater bursts, and greater financial crises as we scramble to rebalance the debt and the financial bubbles that resulted.

But until recently, these bubbles were never orchestrated on a global scale.

Now, the greatest market manipulation in all of history has been globally coordinated by the world’s central banks, who have gone wild with endless money printing to keep the bubble that started in the mid-1990s from bursting.

What’s more, that bubble was already out of control due to decades of manipulation prior.

How do you think we got the Great Recession of 2008 and 2009? It resulted from endless debt growth, and central banks fostering financial bubbles through unprecedented liberal lending policies.

To make it worse, our own Fed decided to ignore the consequences and stop the bubble from fully bursting. Why delay the recovery when we can get it right now?

I don’t know about you, but I lose sleep at night knowing that’s the logic of people charged with controlling our economy… because it shows they obviously don’t have a clue what the economy is all about.

We have stock markets at much higher highs, despite feeble economic growth. We have sovereign bond markets at zero short-term and zero-to-negative long-term rates adjusted for inflation.

It’s political manipulation at its finest… and it takes a government buying massive amounts of debt with money created from thin air.

You know what the effect is on bond holders, but here’s a chart just to drive it home a little further. It’s the U.S. 10-year Treasury bond, adjusted for an average of 3-year inflation rates.

See larger image
Central banks can always set short term rates, and they have set them at near zero since late 2008. But the unique policy this time around is endless QE to buy government bonds and push them to zero, adjusted for inflation.

Prior to QE, investors got 2% yield on these “risk free” longer term bonds. Now, they get zero. Mission accomplished!

When money — both short and long term — is “free,” we abuse it through speculation, thanks to these preposterously low rates. Our stock market is the shining pillar of that.

But over time, long-term rates at zero are far more dangerous.

In the short term, 0% interest rates encourage people to invest at low costs, and institutional investors and hedge funds at much higher leverage. This creates more money chasing more financial assets, from stocks to bonds to real estate.

When they’re zero long term, that sort of speculation becomes the new normal. Since all financial assets are priced relative to longer term risk-free Treasury rates, those other asset classes seem much more valuable… but of course, none of it due to their own merits.

In fact, stocks are valued by projecting the earnings growth of the next 10 years, and then discounting the 10-year Treasury rate back to present value.

Real estate is financed largely by mortgages, and mortgage rates are priced with a risk premium higher than the risk-free long-term Treasury yield.

Then there’s investment grade and junk corporate rates, which are also priced with a risk premium above the risk-free rate.

As a result, each of these asset classes climb higher in value. Lower rates, higher stock prices and higher values for other bond classes. Lower mortgages, more buying power and hence, higher real estate values.

This is what central banks do. They manipulate interest rates to make borrowing more attractive and financial assets more bubbly.

Ultimately, they only create bubbles that burst: 1720, 1835, 1929, and now 2015.

Think twice before playing the central banks’ game.

This is the most globally synchronized bubble in all of modern history, and the most volatile markets since the 1930s.

Buy and hold is dead for at least several years ahead… mark my words on this! It’s better to be safe and/or flexible than sorry… so if you think you can keep holding for the long term, think again!


Source: Economy & Markets

[winston]

The Casualties of Central Bankers By Harry S. Dent Jr.

In the early 1700s, the country had run up astronomical debts from endless wars with the British. They needed money… desperately.

So, John Law — the first central banker in France — turned the Mississippi territory France had just acquired into a stock company.

Stocks were a new trend. People weren’t prepared for the crash that comes when stocks teeter too high. So, they went all in… and what resulted was one of the fastest, most exponential bubbles to build and just as quickly burst that the world has ever seen.

It took just two years for this venture to became a popular get-rich-quick scheme. Shares or parcels of land were sold to the public and financed by the government at lower-than-market rates.

Little did buyers know, the land was basically a swamp, far away so no one could see what they were getting.

Thus, the Mississippi Land Bubble peaked in 1720… then crashed over 90% in just over a year.

It’s one of the classic examples of political manipulation, and the first major financial bubble in modern history. And yes, it was engineered by a central bank… setting a precedent for the future.

England had a similar bubble when it turned its monopoly on trade with the South Seas Trading Company into a public stock — to pay off its debts from the same war France had with them.

These governments didn’t concern themselves with paying their debts in a more sound, responsible way. They manipulated the market to create an artificial bubble for their own advantage.

The U.S. government had its own land scheme in the early 1800s. In an effort to get people to populate the newly acquired Midwest following the Louisiana Purchase, they offered raw land at bargain rates and — you guessed it — low cost government financing.

It was the greatest real estate bubble in U.S. history. And it burst just as quickly.

By the early 1840s, Chicago real estate fell over 90%, along with most of the Midwest.

It got so bad that it turned into the worst depression the country had seen, between 1836 and 1843.

Then came the U.S. Federal Reserve… created to offset the extreme volatility in the economy and interest rates created by that very depression and more to follow into 1896.

A near-century later, after years of stimulus and lower interest rate policies, an even greater depression happened — the Great one, itself.

This was no accident…

When these political entities constantly stimulate the economy in every correction, it never has a chance to rebalance. All we get are greater bubbles, greater bursts, and greater financial crises as we scramble to rebalance the debt and the financial bubbles that resulted.

But until recently, these bubbles were never orchestrated on a global scale.

Now, the greatest market manipulation in all of history has been globally coordinated by the world’s central banks, who have gone wild with endless money printing to keep the bubble that started in the mid-1990s from bursting.

What’s more, that bubble was already out of control due to decades of manipulation prior.

How do you think we got the Great Recession of 2008 and 2009? It resulted from endless debt growth, and central banks fostering financial bubbles through unprecedented liberal lending policies.

To make it worse, our own Fed decided to ignore the consequences and stop the bubble from fully bursting. Why delay the recovery when we can get it right now?

I don’t know about you, but I lose sleep at night knowing that’s the logic of people charged with controlling our economy… because it shows they obviously don’t have a clue what the economy is all about.

We have stock markets at much higher highs, despite feeble economic growth. We have sovereign bond markets at zero short-term and zero-to-negative long-term rates adjusted for inflation.

It’s political manipulation at its finest… and it takes a government buying massive amounts of debt with money created from thin air.

You know what the effect is on bond holders, but here’s a chart just to drive it home a little further. It’s the U.S. 10-year Treasury bond, adjusted for an average of 3-year inflation rates.

See larger image
Central banks can always set short term rates, and they have set them at near zero since late 2008. But the unique policy this time around is endless QE to buy government bonds and push them to zero, adjusted for inflation.

Prior to QE, investors got 2% yield on these “risk free” longer term bonds. Now, they get zero. Mission accomplished!

When money — both short and long term — is “free,” we abuse it through speculation, thanks to these preposterously low rates. Our stock market is the shining pillar of that.

But over time, long-term rates at zero are far more dangerous.

In the short term, 0% interest rates encourage people to invest at low costs, and institutional investors and hedge funds at much higher leverage. This creates more money chasing more financial assets, from stocks to bonds to real estate.

When they’re zero long term, that sort of speculation becomes the new normal. Since all financial assets are priced relative to longer term risk-free Treasury rates, those other asset classes seem much more valuable… but of course, none of it due to their own merits.

In fact, stocks are valued by projecting the earnings growth of the next 10 years, and then discounting the 10-year Treasury rate back to present value.

Real estate is financed largely by mortgages, and mortgage rates are priced with a risk premium higher than the risk-free long-term Treasury yield.

Then there’s investment grade and junk corporate rates, which are also priced with a risk premium above the risk-free rate.

As a result, each of these asset classes climb higher in value. Lower rates, higher stock prices and higher values for other bond classes. Lower mortgages, more buying power and hence, higher real estate values.

This is what central banks do. They manipulate interest rates to make borrowing more attractive and financial assets more bubbly.

Ultimately, they only create bubbles that burst: 1720, 1835, 1929, and now 2015.

Think twice before playing the central banks’ game.

This is the most globally synchronized bubble in all of modern history, and the most volatile markets since the 1930s.

Buy and hold is dead for at least several years ahead… mark my words on this! It’s better to be safe and/or flexible than sorry… so if you think you can keep holding for the long term, think again!


Source: Economy & Markets

[winston]

Here is Proof The Central Banks Have Lost All Control…

By Michael Snyder

Source: The Economic Collapse Blog

http://www.thetradingreport.com/2015/06 ... l-control/

[winston]

99 Trillion Reasons the Fed is Wrong By Rodney Johnson

According to a recent Federal Reserve report, American wealth clocked in at $99 trillion in the first quarter of 2015, setting a new record. More than two-thirds of this is in paper assets, with the remaining third in housing and other assets.

While the value of all consumer real estate has yet to eclipse its previous peak set in 2006, the equity and debt markets have ramped up over the past six years… even as economic activity remains sluggish and wages stagnant.

This probably has a little bit to do with the Fed printing over $4 trillion and force-feeding all the money to the banking system.

Unfortunately that’s about where the story ends. The Fed printed money. Financial assets exploded higher. Wealth increased dramatically.

What hasn’t happened is a knock-on effect that benefits middle America.

The ballooning wealth created over the last half decade remains firmly in the hands of a small percentage of people, thanks to paper assets they’ve accumulated along the way.

This isn’t a rant against wealth or one-percenters. Instead, this is a simple assessment that the Fed’s efforts to right the economic ship by printing massive amounts of cash have failed in every way. Not in every way but one — “what about the equity markets?” — but in every way. Rising equity markets do not spread benefits far and wide across the land.

The government can’t stop it. Stimulus, bailouts, interest rate manipulations and the printing of trillions of paper money have failed. Nothing more can be done to delay the inevitable.

Preparation is now essential... can you survive?

A couple of years ago I wrote that the Fed was attacking unemployment all wrong. They were printing roughly $75 billion per month and buying bonds, hoping that a combination of more liquidity and lower interest rates would spur borrowing and lead to a jump in economic growth.

If they were going to do that, why not just hold a lottery among all who were unemployed! They could’ve picked 750,000 “winners” at random, then given these lucky contestants $100,000 over the course of the next year.

The caveat is they would’ve had to spend it all, and neither receive unemployment benefits nor take a job during that time.

Doing this would have shaved half a percent off of the unemployment rate each month, while putting cash directly into the hands of consumers. The winners could’ve even used the money for education to learn new skills.

Think about how beneficial such a program would have been!

Instead of shoving more money into the excess reserve accounts of banks, those greenbacks would be zipping around the economy right now. What’s more, it would not have taken trillions of dollars to achieve success.

A mere $750 billion of new money directed in this way would have lowered unemployment by 5% and created a firestorm of new cash in the system.

Ordinary people would have received the money. Spending would be up. Inflation would have ticked higher. What’s not to like?

Of course, I say all this somewhat tongue-in-cheek. I’m not a fan of printing money then directing it through a pipeline from central bankers to citizens. In fact, I’m not a fan of money printing in general.

But there is a group that is taking this seriously… and their qualifications might surprise you.

As the European Central Bank geared up to implement its own quantitative easing (QE) program earlier this year, a group of well-known economics professors signed a letter calling for more direct intervention.

Coming from the College of London, the London School of Economics, and Kingston University, among others, they noted: “Conventional QE is an unreliable tool for boosting GDP or employment.”

They went on to reference research by the Bank of England that showed QE benefits the well-off while doing little for the poorest in society. With interest rates low, the group felt more liquidity would do little to jump start the economy.

We couldn’t agree more.

They went on to suggest that the ECB use newly printed euros to fund infrastructure projects. That would directly boost employment.

They also recommended the central bank simply send every euro zone citizen 175 euros per month for the expected duration of the QE program (19 months). They could use the money to pay down debts, or simply spend as they see fit.

Maybe they dusted off my article from a while back, but I doubt it. I was just joking. These people are serious!

They have a point. Printing money and sending it directly to consumers would definitely provide a broader boost to the economy than simply driving up financial assets. The problem is, it would still be an artificial bump. Worse, it would extract value from savers.

But that’s not the reason central banks won’t make such a move.

When a central bank prints money and ships it off to a third party, it takes the central bank out of the picture.

However, when a central bank uses the newly printed currency to buy assets, it retains control over the assets and thereby stays in the game. The bank can influence economic activity by choosing when and how to divest of the asset. It keeps the world guessing, and it keeps them in power.

So under the current system, small groups of central bankers maintain their access and control over economies by purchasing assets, and the benefits they create flow to small groups of wealthy investors.

As for the everyday citizens, they get the joy of earning below-market rates on their savings and deposit accounts. Everything would be alright if they only borrowed more… or so says the central bankers.

Source: Economy & Markets

[winston]

99 Trillion Reasons the Fed is Wrong By Rodney Johnson

According to a recent Federal Reserve report, American wealth clocked in at $99 trillion in the first quarter of 2015, setting a new record. More than two-thirds of this is in paper assets, with the remaining third in housing and other assets.

While the value of all consumer real estate has yet to eclipse its previous peak set in 2006, the equity and debt markets have ramped up over the past six years… even as economic activity remains sluggish and wages stagnant.

This probably has a little bit to do with the Fed printing over $4 trillion and force-feeding all the money to the banking system.

Unfortunately that’s about where the story ends. The Fed printed money. Financial assets exploded higher. Wealth increased dramatically.

What hasn’t happened is a knock-on effect that benefits middle America.

The ballooning wealth created over the last half decade remains firmly in the hands of a small percentage of people, thanks to paper assets they’ve accumulated along the way.

This isn’t a rant against wealth or one-percenters. Instead, this is a simple assessment that the Fed’s efforts to right the economic ship by printing massive amounts of cash have failed in every way. Not in every way but one — “what about the equity markets?” — but in every way. Rising equity markets do not spread benefits far and wide across the land.

The government can’t stop it. Stimulus, bailouts, interest rate manipulations and the printing of trillions of paper money have failed. Nothing more can be done to delay the inevitable.

Preparation is now essential... can you survive?

A couple of years ago I wrote that the Fed was attacking unemployment all wrong. They were printing roughly $75 billion per month and buying bonds, hoping that a combination of more liquidity and lower interest rates would spur borrowing and lead to a jump in economic growth.

If they were going to do that, why not just hold a lottery among all who were unemployed! They could’ve picked 750,000 “winners” at random, then given these lucky contestants $100,000 over the course of the next year.

The caveat is they would’ve had to spend it all, and neither receive unemployment benefits nor take a job during that time.

Doing this would have shaved half a percent off of the unemployment rate each month, while putting cash directly into the hands of consumers. The winners could’ve even used the money for education to learn new skills.

Think about how beneficial such a program would have been!

Instead of shoving more money into the excess reserve accounts of banks, those greenbacks would be zipping around the economy right now. What’s more, it would not have taken trillions of dollars to achieve success.

A mere $750 billion of new money directed in this way would have lowered unemployment by 5% and created a firestorm of new cash in the system.

Ordinary people would have received the money. Spending would be up. Inflation would have ticked higher. What’s not to like?

Of course, I say all this somewhat tongue-in-cheek. I’m not a fan of printing money then directing it through a pipeline from central bankers to citizens. In fact, I’m not a fan of money printing in general.

But there is a group that is taking this seriously… and their qualifications might surprise you.

As the European Central Bank geared up to implement its own quantitative easing (QE) program earlier this year, a group of well-known economics professors signed a letter calling for more direct intervention.

Coming from the College of London, the London School of Economics, and Kingston University, among others, they noted: “Conventional QE is an unreliable tool for boosting GDP or employment.”

They went on to reference research by the Bank of England that showed QE benefits the well-off while doing little for the poorest in society. With interest rates low, the group felt more liquidity would do little to jump start the economy.

We couldn’t agree more.

They went on to suggest that the ECB use newly printed euros to fund infrastructure projects. That would directly boost employment.

They also recommended the central bank simply send every euro zone citizen 175 euros per month for the expected duration of the QE program (19 months). They could use the money to pay down debts, or simply spend as they see fit.

Maybe they dusted off my article from a while back, but I doubt it. I was just joking. These people are serious!

They have a point. Printing money and sending it directly to consumers would definitely provide a broader boost to the economy than simply driving up financial assets. The problem is, it would still be an artificial bump. Worse, it would extract value from savers.

But that’s not the reason central banks won’t make such a move.

When a central bank prints money and ships it off to a third party, it takes the central bank out of the picture.

However, when a central bank uses the newly printed currency to buy assets, it retains control over the assets and thereby stays in the game. The bank can influence economic activity by choosing when and how to divest of the asset. It keeps the world guessing, and it keeps them in power.

So under the current system, small groups of central bankers maintain their access and control over economies by purchasing assets, and the benefits they create flow to small groups of wealthy investors.

As for the everyday citizens, they get the joy of earning below-market rates on their savings and deposit accounts. Everything would be alright if they only borrowed more… or so says the central bankers.

Source: Economy & Markets

[behappyalways]

Liquidity
http://www.oaktreecapital.com/memotree/liquidity.pdf

[winston]

From ZIRP to NIRP By Rodney Johnson

Sailing can be exhilarating. A 20-mile-per-hour wind pushes everything – crew, boat, sails, hardware – to the limit.

But there are other days when the breeze simply dies. If you’re out for a leisurely sail, then no problem. Just crank up the engine. However, if it happens during a race, you can find yourself sitting dead in the water, or worse… going backward with the tide.

A friend of mine was in this exact situation when the skipper called on the crew to lower the anchor. As they scurried about the deck appearing to look busy with the sails, the other boats slowly slipped behind them, floating backward.

In a sense, my friend’s boat gained ground by going nowhere.

The Fed governors have done the same. For all of their talk, they’ve moved ahead by not floating backward with the pack.

Over the last two years, four central banks in Europe did something that was once unthinkable. When their zero interest rate policy (ZIRP) didn’t work, they went lower. They moved interest rates into negative territory, introducing a negative interest rate policy (NIRP).

The European Central Bank (ECB), along with the central of Denmark, Sweden and Switzerland, all charge large depositors to hold cash.

This might seem backwards, because it is. Theoretically, depositors who don’t want to pay the fees could withdraw all of their cash from banks, thereby escaping them.

But that doesn’t work in the real world.

While the average Joe might be able to shut down his checking account, it’s a bit tougher for IBM, Caterpillar, or New York Life Insurance to do the same thing.

Cash management is a multi-trillion dollar industry. Huge sums are moved daily to meet endless obligations, from payroll to bond payments. There’s no way for entities as large as these to avoid, or even minimize, their interactions with the banking system.

So, even though it flies in the face of the modern banking relationship, they pay the fees.

This is not normal. Ordinarily, deposit institutions take cash from clients, pay them interest, and then lend the money at higher rates to borrowers.

Today, banks can’t find enough borrowers. The cash sits unused on their books, collecting dust and costing the banks money. The negative interest rates are supposed to motivate those holding cash to lend it or spend it, thereby driving economic activity.

But without great investment prospects or quality borrowers, there’s no reason to do either. Instead, they hold onto the cash, confident that low inflation or even deflation will keep prices in check so that the cash won’t lose too much value.

While European central banks toy with the unthinkable, on this side of the pond, Fed governors keep sparring over when to raise rates from zero.

They go back and forth over employment and inflation figures, trying to parse out current trends. If the economy is improving, then raising rates now would nip potential inflation before it starts. It would also provide the Fed with some much-needed room for lowering rates in the next downturn.

Interestingly, by doing nothing, the Fed has achieved most of what it wants. Compared to other currencies our rates are high, which attracts depositors, strengthens the U.S. dollar, and taps the brakes on the economy.

So while zero interest might not sound like much, compared to what depositors earn in other countries, it’s a windfall!

The difference grows wider further out on the yield curve. The 10-year U.S. Treasury bond yields around 2.0%. The German 10-year pays a mere 0.5%, while those buying Swiss 10-year bonds must pay the government because the yield is -0.3%!

Looking across our economy, companies are telling the Fed that they feel the pain. Quarterly profits and revenue are set to decline together for the first time since the financial crisis. Earnings are expected to decline by 2.8% for the third quarter and sales, which have been falling all year, are expected to drop by 4%.

Hit by a double whammy of the collapsing energy sector and falling exports, big companies are crying uncle. None of this screams that economic growth is so strong it must be reined in. If anything, it looks like the start of the next downturn is just ahead, if not already underway.

That makes the most likely course ahead not for higher rates, but for the Fed to raise its anchor off zero, and at some point start slipping backward with the rest of the fleet.

Source: Economy & Markets